Banks try to revoke tax exemptions from credit unions

Wednesday

Jul 17, 2013 at 5:06 PMJul 17, 2013 at 5:07 PM

By Jack BarnwellCITY EDITORjbarnwell@ridgecrestca.com

Credit unions are finding themselves under renewed pressure from the banking industry amidst apparent concern over tax breaks to smaller financial institutions.This concern, in addition to those addressing potential challenges posed to banks, have led banking industry insiders to beseech the White House to revoke tax exemptions afforded to credit unions since the Great Depression.Frank Keating, president of the American Bankers Association, sent a letter to President Barack Obama asking for a hard look at the growing credit union industry."Many tax-exempt credit unions have morphed from serving 'people of small means' to become full-service, financially sophisticated institutions,” Keating stated in his letter to Obama. “The time has come to abolish this exemption."In response, many credit unions are launching campaigns to counter the banking industry's attempts to revoke the decades-long tax exemption, even as Congress begins looking over the tax code.Desert Valleys Credit Union in Ridgecrest is among those leading the charge by calling for 1,000 letters to be written to Congress as part of a grassroots effort to reject the idea.“Our members are the most valuable people in this,” said Eric Bruen, CEO of Desert Valleys Credit Union.Bruen said that banks have pushed for decades to have what is seen as an unfair competitive advantage revoked.“The fact is, the tax exemption is not a competitive advantage,” Bruen said Tuesday. “If you took every dollar in the U.S. economy and stacked them up, 94 percent would be in the banks, and only 6 percent would be in credit unions.”President Obama's proposed 2014 budget cites that the tax exemption saved credit unions from paying $1.6 billion in taxes in 2013. The amount would increase to $2.2 billion in 2018.But removing exemptions would cost credit unions, which are owned by members rather than shareholders, and it would be a huge blow to the its annual return on assets.In the U.S. alone, there are 95.7 million credit union members, according to SNL Financial. Desert Valleys has 4,000 members, serving Ridgecrest, Trona and the surrounding area with an asset base of $23 million.Of its $114,000 return of assets in 2012, it invested $32,750 in donations to the community, Bruen said.“I would challenge any of the local banks to show me that they put the same cash values back into the community,” Bruen said. “The moment you tax credit unions, those dollars come straight out of the community they're serving.”Bruen contends that removing the tax exemption will do more harm than good. Removal of the Desert Valleys FCU tax exemption would cost $38,000.“Where do you think I will have to make up that $38,000?” Bruen asked. “From the community.”Bruen said that credit unions had a better track record traditionally than banks, especially in light of the collapse of several major banks during the Great Recession, when billions of dollars were lost. Credit unions are beholden to their members, not to stake holders trying to maximize profit.Credit unions remained small, serving communities and groups like teachers or military service members. When the 2008 financial crisis hit, people began migrating from banks in part because of campaigns by consumer groups, and in part by a distrust of the larger banks.Now, as those institutions are growing – some by leaps and bounds – bank industry insiders are crying foul. Their stance: Tax exemptions are providing unfair advantages while trying to expand in service.James Ballentine, the American Bank Association's vice president of congressional affairs, said Tuesday that while credit unions were originally provided tax exemption status to serve certain segments of communities, it has changed."As the credit union has evolved, many have outgrown their common bonds," Ballentine said. "In some respects, they are growing outside their counties or their state."Ballentine said the banking industry is not interested in the smaller credit unions that fall within their scope of service. "There is a credit union in Illinois, for example, that makes loans in Florida," Ballentine said. "A credit union's common bond is not the U.S, it is a group they serve."Instead, he said the approach should be looking at the larger credit unions."If you had a $500 million credit union across the street from a $500 million community bank, both would be offering the same services, but the credit union has an unfair advantage with its tax exemption," Ballentine said.Of the 7,000 credit unions in the U.S., Ballentine said 200 held approximately $1 billion in assets each.However, Bruen said there was plenty of room within the industry, especially for credit unions of different sizes. He said while different-sized credit unions serve different groups and missions, it also made sense to expand or merge for others. "It's the simple fact of life,” Bruen said. “There are advantages in economy of scale as resources come together."Bruen said, in short, that credit unions were evolving with the times.One area that credit unions are wanting to push into is higher business lending. Federal law caps how much a credit union can loan out for businesses. Credit unions can only lend 12.25 percent of total assets for business purpose, and Congressional supporters of credit unions are seeking to lift it to 27.5 percent.This is something that Ballentine, the American Bank Association vice president, that shouldn't be allowed.“What credit unions want to do is remain credit unions, be treated as credit unions, but want to do the same types of things banks want to do,” he said. “They can do that, so long as they pay taxes. You can't do it multiple ways.” Bruen said the opposite side of the coin would allow more investment in the community.“We believe lending to small businesses leads to more jobs, and credit unions have the capital ready to lend, but regulations say don't loan to small businesses,” Bruen said. “Economically, over the last six years, does it make sense to have a regulation that says don't lend to small businesses and promote economic increase?”Removal of a tax exemption, however, would put tax credit unions in a precarious stage, however.“A member of any federal credit union has a stake in this game,” Bruen said. “Because the moment taxation changes, how a credit union fundamentally serves you will change as a result of that.”